Yesterday, the Supreme Court held that state-action immunity from antitrust liability does not apply to decisions of a state agency where a “controlling number” of its members are participants in the market regulated by that agency—such as professional licensing boards—unless independent state officials actively supervise the agency’s decisions.  The Court made clear that a state agency will satisfy that “active supervision” requirement only if a State official who does not participate in the market at issue in a private capacity has the power to review and overrule the state agency’s decisions.

I.    State Action Doctrine And The Dispute At Issue

Adopted in 1943 in Parker v. Brown, the state-action doctrine essentially provides that actions taken by state officials or private actors to further a clearly articulated state policy are immune from attack under our antitrust laws.1  In previous cases, the Court has held that decisions by private actors are only cloaked with state-action immunity if done under the “active supervision” of the state.2  That rule exists to ensure that politically accountable state officials can determine if decisions of private actors really further the state policy at issue rather than the private actors’ parochial interests.

In North Carolina State Board of Dental Examiners v. Federal Trade Commission, No. 13-534 (“Board of Dental Examiners”), the Court addressed whether—and if so how—the active-supervision requirement applies to an entity that the State nominally designates a “state agency,” but that is nonetheless controlled by private actors. Under North Carolina law, the North Carolina State Board of Dental Examiners (Board) regulates the practice of dentistry.   By law, six of its eight members much be licensed dentists in North Carolina.

The case involved Board actions relating teeth whitening.  Faced with increased competition from nondentists, the Board sent cease-and-desist orders to nondentist teeth whitening services, implying that by engaging in teeth whitening the nondenstists were illegally engaging in the “practice of dentistry” without a license.   Those letters cowed nondentists into exiting the teeth whitening business, to the direct benefit of the dentists who controlled the Board.  The FTC sued, claiming that the Board’s actions were designed to eliminate legitimate competition from nondentists.   The Board raised state-action immunity as a defense, which both the FTC and Fourth Circuit rejected.  The Supreme Court affirmed.

The Court held that active supervision is required for all “nonsovereign” entities like the Board.  “[A] nonsovereign actor is one whose conduct does not automatically qualify as that of the sovereign State itself.”3    Noting that “[s]tate agencies are not simply by their governmental character sovereign actors for purposes of state-action immunity,” the Court held that “[i]mmunity for state agencies . . . requires more than a mere facade of state involvement, for it is necessary in light of Parker’s rationale to ensure the States accept political accountability for anticompetitive conduct they permit and control.”4  The Court therefore flatly concluded that “active supervision test is an essential prerequisite of [state action] immunity for any nonsovereign entity—public or private—controlled by active market participants.”5

The Court rejected the Board’s argument that entities the State designates as its “agency” are categorically exempt from the active-supervision requirement.  The Court held that “the need for supervision turns not on the formal designation given by States to regulators but on the risk that active market participants will pursue private interests in restraining trade.”6  The Court analogized state boards governed by market participants to private trade associations “vested by States with regulatory authority,” distinguishing them from state agencies not controlled by market participants, which can be trusted to act in the public interest.7  “When a State empowers a group of active market participants to decide who can participate in its market, and on what terms, the need for supervision is manifest.”8

The Court therefore held: “[A] state board on which a controlling number of decisionmakers are active market participants in the occupation the board regulates must satisfy [the] active supervision requirement in order to invoke state-action antitrust immunity.”9 The Court also concluded that the Board was not under the active supervision of the State because no officials even knew about—much less authorized—the conduct at issue. “[T]he Board did not receive active supervision by the State when it interpreted [a statute] as addressing teeth whitening and when it enforced that policy by issuing cease-and-desist letters to nondentist teeth whiteners.”10 The Court therefore rejected applying the state-action immunity doctrine to those decisions.11

II.     Implications Of The Court's Decision

Board of Dental Examiners is an important decision for state agencies run in whole or in part by individuals who compete in the market the agency regulates.  First, the Court made clear that the active supervision requirement applies to any entity that is controlled by market participants.  Before Board of Dental Examiners, it was unclear whether formal state agencies were categorically exempt from the antitrust laws, even if the agency was dominated by private actors.  Today’s decision makes clear that all such entities must be subject to the active supervision of independent state officials to enjoy state-action immunity.

Second, the Court made clear that control by private  actors is generally the key question. The Court held that “a state board on which a controlling number of decisionmakers are active market participants” is subject to the active supervision requirement.12  The use of  the phrase “controlling number” implies that whether the active participation requirement applies will be governed by state law:  whatever number of votes are necessary under state law to control a particular agency’s decision will determine whether the active supervision requirement applies.

Third, the possibility that state boards staffed by private actors are not necessarily immune from antitrust suits means that private-actor board officials must be mindful of the possibility of private damages actions against them.  The Court specifically reserved the question whether private board members might enjoy immunity from such suits.13  That issue promises to be hotly contested in the coming years, as today’s decision will likely spur antitrust litigation against officials who wear “two hats” (that is, who exercise public authority but who also participate in the market in a private capacity).

Fourth, the Court offered helpful guidance as to how state agencies run by private actors can ensure that state officials have sufficient control of the agency’s decisions to trigger state-action immunity.  Noting that the inquiry is “flexible and context-dependent,” the Court stated that “[a]ctive supervision need not entail day-to-day involvement in an agency’s operations or micromanagement of its every decision.”14  The key “question is whether the State’s review mechanisms provide ‘realistic assurance’ that a nonsovereign actor’s anticompetitive conduct ‘promotes state policy, rather than merely the party’s individual interests.’”15  The Court then identified three “constant requirements of active supervision”:  (1) the “supervisor must review the substance of the anticompetitive decision, not merely the procedures followed to produce it”; (2) “the supervisor must have the power to veto or modify particular decisions to ensure they accord with state policy,” because “the mere potential for state supervision is not an adequate substitute for a decision by the State”; and (3)  “the state supervisor may not itself be an active market participant.”16